VAT tax cut comes into force

A 2.5 percent cut in Value Added Tax came into force on Monday as retailers geared up for what they hope will be a pre-Christmas shopping rush.

LONDON Dec 1 (Reuters Life!) - A 2.5 percent cut in Value Added Tax came into force on Monday as retailers geared up for what they hope will be a pre-Christmas shopping rush.

Chancellor Alistair Darling announced the measure as part of his pre-budget report last month in an attempt to ease the pain of the economic downturn.

The move effectively cuts the price of goods by 2.1 percent and will cost the government an estimated 12.4 billion pounds in revenue until it is withdrawn in January 2010.

To counter the loss, Darling put up duties on alcohol and tobacco. Unlike the VAT change, these duty rises are permanent, adding around 3 pence to a pint of beer and 17 pence to a packet of 20 cigarettes.

Some retailers, such as Dixons and PC World owner DSG, introduced the VAT cut immediately after Darling's announcement on November 24.

Others will introduce it from Monday, although shoppers may initially notice that the prices on goods are higher than the amount they are charged at the till while retailers bring in the change.

Shops have two weeks to make sure shelf prices all accurately reflect the tax change.

The reduction should favour poorer families as they are the most affected by the extra cost of the sales tax on everyday goods.

But it will not affect sales of zero-rated items such as food, children's clothes and books.

Analysts said the measure should give a modest boost to Christmas sales volumes but cautioned that its impact would be will be limited given that retailers are already discounting massively to kick-start trading, subdued by rising unemployment, falling house prices and tight credit.

The British Retail Consortium said the VAT change represented a huge task for retailers to implement but was still welcome.

"Major retailers have been saying that this ... could contribute to making a difference to consumer confidence," a BRC spokesman said.

(Reporting by Tim Castle; Editing by Steve Addison and Paul Casciato)